St. John Founders Want Company Back

St. John Knits Inc.’s founders, saying they’re tired of trying to satisfy Wall Street’s insatiable demand for rapid growth, announced plans Tuesday to buy all the shares of the upscale clothing maker and take it private.

“We wanted to slow the growth down, and Wall Street doesn’t like slow growth,” Chief Executive Robert E. Gray said Tuesday. “We feel the best way to do that is by being private.”

The Gray family is offering to buy the shares it doesn’t already own for $28 per share, or about $490 million in cash. The offer is about 28% above the Tuesday closing stock price of $21.94. The bid was announced after the stock market closed.

Currently, Gray, his wife Marie St. John Gray and their daughter Kelly Gray, the company’s president, have a 13.6% stake in St. John.

The Irvine-based company said Tuesday its board has formed an independent committee to evaluate the proposal.

With the company’s stock now trading at less than half its 52-week high of $48.31, Wall Street analysts have suggested that St. John has been ripe for takeover. Indeed, the company last month adopted a “poison pill” plan designed to thwart a hostile bid.

But Gray said Tuesday that the company has not received any offers to purchase the company over the past six months.

This is the second move this month by a high-profile Orange County entrepreneur to take a company private. Last week, billionaire developer Donald L. Bren offered to buy the shares of Irvine Apartment Communities Inc. that he doesn’t already own for $540 million. Bren said he made that move because Wall Street and banks have written off real estate investment trusts.

St. John’s stock has been pummeled this year after the company issued warnings that its earnings wouldn’t meet analysts’ expectations in the second and third quarters. The company also admitted this year to quality control problems that resulted in a recall of some imperfect garments. The company blamed those problems, in part, on an attempt to grow too quickly.

More recently, the high-end garment maker has been hit with several lawsuits, including a wrongful termination claim filed by Amen Wardy Jr., who was fired in September as chief executive of the money-losing Amen Wardy Home Stores, a St. John subsidiary.

But Gray said neither the limelight nor the lawsuits influenced the family’s decision to try to reclaim the company that he and his wife founded. Rather, he said, it was the desire to run St. John as they did when it was private, making decisions based on what they think is best for the company, apart from the pressures of Wall Street.

Specifically, Gray said he would like to trim the company’s sales growth rate to 10%, rather than its historic annual growth rate of 25%, to concentrate on the quality of its products.

Gray also said he wanted to be more selective about what stores sell St. John merchandise. He declined to elaborate.

Under the family’s ownership, the company would continue producing the same clothing lines, jewelry and other accessories, with one exception, he said. St. John is planning to drop its less expensive SJK line that was launched last year to appeal to younger customers. The line will be discontinued, regardless of who owns the company, he said.

Gray has received a commitment from Vestar Capital Partners to provide equity financing for the purchase. Vestar is no stranger to the apparel business, having previously purchased stakes in Sun Apparel Inc., which holds the license for Polo Jeans Co. clothing, and Cluett American, which has the Arrow shirt and Gold Toe sock brands.

“We really consider this an investment in the Gray family,” said Jim Kelley, Vestar’s managing director. “They built this company and made it what it is today and are critical to its management.”

The family’s management of the company has raised some eyebrows in the past as investors questioned the wisdom of making Kelly Gray president and priming her to take over as chief executive when her father retires. Robert Gray said the company still plans to eventually move Kelly Gray, 32, into the top job.

‘Kelly . . . is in training to be CEO,” he said. “It’ll happen when Kelly is ready to assume that responsibility.”

Robert Gray, 73, said the company’s employees are aware of the family’s plans to buy the company and “upper management has been part of the discussions.” He declined to say how long they have been planning the purchase.

The Grays launched their business from a garage 35 years ago after Marie St. John bought a knitting loom and began making Chanel-like outfits. Gray began selling his then-fiancee’s designs to department stores. By 1969, the company had sales of $1 million.

With Robert Gray struggling with health problems in 1989, the couple sold the expanding business to Escada, a German clothing company that also makes high-end women’s apparel, for $45 million.

As chief executive, Robert Gray helped Escada raise money to take the company public in 1993. At that point, the Grays and their managers retained about 20% of the shares.

Marie Gray, 62, is still St. John’s vice chairman and chief designer.

David Harman, director of Cal State Fullerton’s Family Business Council, which aids family-owned businesses, said his group warns families considering taking their company public that it will mean “life in the fish bowl.”

“I don’t think they’ve liked all the press they’ve gotten,” he said of the Gray family.

While it is “a rarity” for a family business to go public and then buy back all the company’s shares, it could be a wise move for the Grays, considering the price of their stock, he said. If they do reclaim the company, and it prospers, the Grays could even consider going public again later, should they want to raise more money to pay estate taxes or for other reasons.

“They could very easily do it again,” he said.

Vestar’s Kelley said his firm has not discussed that option with the Grays “in any detail.”

“Our investment horizon is typically five to seven years,” he said.

Most family-operated businesses don’t manage to stay in the family. Only one-third are passed on to the second generation, Harman said, and just 10% make it to the third generation.

Often, heirs can’t afford to pay the steep estate taxes, which means they must sell the company or take it public, he said.

St. John operates 16 retail boutiques and nine outlet stores, as well as selling in high-end department stores, such as Nordstrom and Saks Fifth Avenue. This week, the company is opening a larger St. John boutique at South Coast Plaza, which has an attached Amen Wardy Home Store.

Gray said the company is currently eyeing two or three more sites for possible new stores, but he declined to say where.

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Seeking Privacy

The Gray family, founders of the upscale women’s fashion firm St. John Knits, will try to take the company private. The Grays have offered $28 per share for the shares that they do not already own. That’s nearly 28% above the closing price Tuesday. A look at the company, how the family fits into the picture, sales/earnings in millions and weekly closing stock prices:

St. John Knits at a Glance

Founded: 1963

Headquarters: Irvine

Business: Designs and makes upscale women’s clothing, jewelry and accessories.

Employees: 3,255

Initial public stock offering: March 1993

Price: $8.50 (adjusted for 2 for 1 split)

The Gray Family

Stake in the company: 13.6%

Robert E. Gray: Chairman, chief executive officer

Marie St. John Gray: Vice chairman, secretary, chief designer

Kelly A. Gray: President

SALES

1998 3rd quarter: $67.73

EARNINGS

1998 3rd quarter: $7.33

CLOSING PRICES

Tuesday close: $21.94

Source: Bloomberg News